After the spectacular implosion of FTX last week, questions about what brought the once-mighty exchange to its knees are swirling – and lawmakers want answers.
Senators Elizabeth Warren (D-Mass.) and Dick Durbin (D-Ill.) sent a letter on Wednesday to both the Bahamas-based exchange’s former CEO, Sam Bankman-Fried, and its current CEO, former Enron clean-up man John Jay Ray III, who replaced Bankman-Fried after FTX and its 130-odd subsidiaries declared bankruptcy on November 11, asking for more information about what precipitated the exchange’s collapse.
Warren and Durbin, both longtime, outspoken crypto skeptics, said the collapse of FTX – which, until recently, had a $32 billion valuation and was largely perceived as one of the most stable exchanges in the industry – “justify our long-standing concerns that the crypto industry ‘is built to favor scammers’ and ‘designed to reward insiders and to defraud mom-and-pop investors’.”
Bankman-Fried's father, Stanford law professor Joseph Bankman, helped Warren draft legislation for her Tax Simplification Act in 2016, and was previously a donor to her campaign.
Their letter kicks off an investigation into the collapse of FTX and the behavior of Bankman-Fried and his close-knit circle of fellow executives, who have been accused of self-dealing and fraud – behavior the Senators say “appears to be an appalling case of greed and deception.”
Warren and Durbin’s letter establishes a timeline for FTX’s collapse, beginning with CoinDesk’s report on Nov. 2 that Bankman-Fried’s quant trading firm Alameda Research’s holdings were largely comprised of FTT, FTX’s native token – a revelation that sparked a liquidity crisis as investors lost confidence and began withdrawing funds from the exchange.
Despite Bankman-Fried’s initial assurance to investors that their assets were fully backed on Nov. 7, the exchange halted withdrawals the next day, and Bankman-Fried’s promises were revealed to be baseless. On Nov. 8, rival exchange Binance indicated its interest in a potential bail out, but pulled out of the deal the next day, claiming FTX’s issues were “beyond our control or ability to help.”
After the Binance acquisition fell through, FTX’s remaining fall from grace was swift and chaotic.
“One thing is clear: the public is owed a complete and transparent accounting of the business practices and financial activities leading up to and following FTX’s collapse and the loss of billions of dollars of customer funds,” the Senators wrote in their letter.
By Nov. 28, Ray and Bankman-Fried are required to provide Warren and Durbin with information and documents about FTX and its subsidiaries’ balance sheets, the cause of the exchange’s liquidity crisis, its rationale for buying bankrupt crypto exchange Voyager Digital, and whether reports that Bankman-Fried and other executives built a “backdoor” into FTX’s accounting system to allow them to alter financial records and move money around without alerting other people are accurate.
The current and former FTX CEOs are also required to provide historical data about FTX’s transfers to Alameda Research, the relationship between FTX and Alameda Research, and what happened to the missing customer funds.
Warren and Durbin’s letter also demands answers – and internal communications – about the late-night hack on Nov. 11, which saw hundreds of millions of dollars drained from FTX-controlled wallets.
Both U.S. Securities and Exchange Commission (SEC) Chairman Gary Gensler and the Commodity Futures Trading Commission (CFTC) Chairman Rostin Behnam, whose agencies are investigating the exchange alongside the U.S. Department of Justice are cc’d on the letter.